Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance

Abstract:     
Trapped in a metaphor created at the founding of modern corporate law, the study of corporate governance has - for some thirty years - been asking the wrong questions. Rather than a singular race among states, whether to the bottom or the top, the synthesis of Cary and Winter's famous exchange is properly conceived as two competitions, each serving distinct normative ends. Managerial competition promotes the project that has motivated corporate law since Berle and Means - efficient regulation of the separation of ownership and control. State competition, by contrast, advances neither a race to the top nor to the bottom in shareholder-managerial relations.

Instead of the vertical allocation of wealth between shareholders and managers, state competition speaks to its horizontal allocation between state and firm. Even as state competition encourages a shift of surplus from state to firm, it is entirely agnostic as to the distribution of that surplus within the firm. Understood as such, the metrics of "efficiency" in corporate governance - and hence the core inquiries of the corporate law literature - must necessarily shift. Prevailing approaches to questions from the potential utility of federal corporate law to the long persistence of state anti-takeover statutes must likewise be reconsidered.

Number of Pages in PDF File: 58

Keywords: federalism, corporate federalism, state competition, interstate competition, charter competition, managerial competition, efficient capital markets, market for corporate control, regulatory failure, managerial failure, agency costs, separation of ownership and control, Cary, Winter, race to the top

JEL Classification: D21, D23, D71, D72, G18, G32, G38, H11, H73, K22

working papers series